Examples of Letter of Credit (LC)
1. Import of Electronics: A major items of cellphones from a US company is intended for import by an electronics shop in India. The retailer opens an irrevocable and verified Letter of Credit through their bank to guarantee payment to the manufacturer. The amount of smartphones, quality requirements, delivery conditions and documentation needed for payment are all detailed in the LC. The American manufacturer ships the devices, gets the required paperwork to their American bank and the LC is recognised, guaranteeing the company gets paid.
2. Supplier Financing: An Indian garment merchant purchases clothing from a Bangladeshi producer. The factory receives a standby Letter of Credit from the retailer, who has a track record of creditworthiness, giving its suppliers financial certainty. As the standby LC guarantees payments to suppliers in the event that the facility fails to pay, this enables the factory to acquire labor and raw materials without requiring advance payment.